Greetings, and welcome to the Myriad Genetics Second Quarter 2020 Financial Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today, Thursday, February 6, 2020. I would now like to turn the conference over to Scott Gleason, VP, Investor Relations. Please go ahead.

Thanks, Dave. Good afternoon, and welcome to the Myriad Genetics fiscal second quarter 2020 earnings call. During the call, we will review the financial results we released today; after which, we will host the question-and-answer session. If you’ve not had a chance to review our quarterly earnings release, it can be found on our website at myriad.com. Presenting for Myriad today will be Bryan Riggsbee, Chief Executive Officer. This call can be heard live via webcast at myriad.com. And a recording will be archived in the Investors Section of our website. In addition, there is a slide presentation pertained to today’s earnings call on the Investors Section of our website, in which we filed following the call on Form 8-K. Please note that some of the information presented today may contain projections or other forward-looking statements regarding future events or the future financial performance of the Company. These statements are based on management’s current expectations and the actual events or results may differ materially and adversely from these expectations for a variety of reasons. We refer you to the documents the Company filed from time to time with the Securities and Exchange Commission, specifically the Company’s annual report on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. With that, I’m pleased to turn the call over to Bryan.

Thank you, Scott, and thank you everyone for joining today’s call. Before we discuss our second quarter results, I want to spend a moment talking about today's other announcements. We announced this afternoon that Mark Capone has resigned as President and CEO and as a member the company's Board of Directors. I have been appointed Interim President and CEO and will serve in this role as well as continue as CFO, while the Board conducts the search for Mark's replacement. We have made numerous scientific and business advances during Mark's 17 years with the company that have contributed significantly to the health and transformation of patients life around the world. Mark played a pivotal role in guiding the company to where it is today, and on behalf of the company, I want to thank him for his leadership. Ultimately as we position Myriad for its next phase of growth and value creation, the Board and Mark have mutually agreed that now it's the right time for a leadership transition. I want to take this opportunity to emphasize that we remain confident in Myriad and the numerous growth drivers in front of us, and as interim CEO in an organization we are highly focused on positioning the business for sustained profitable growth. We’ve a talented team and strong foundation that will drive us forward as we deliver on our value creation objective and execute on our critical success factors to position Myriad for the future. With that said, this call is about our second quarter earnings. If you have questions related to the leadership transition, I will refer you to the press release we issued this afternoon for additional background. Now let me turn to the quarterly financial results. In the fiscal second quarter, we generated revenue of $195 million and…

Thanks, Bryan. As a reminder, during today's call we use certain non-GAAP financial measures. A reconciliation of the GAAP financial results to the non-GAAP financial results and a reconciliation of GAAP to non-GAAP financial guidance can be found under the Investor Relations section of our website. Now we are ready to begin our Q&A session. In order to ensure broad participation in today’s Q&A session, we ask participants please ask only question and one follow-up. Operator, we are now ready for the Q&A portion of the call.

Thank you very much. [Operator Instructions] First question comes from the line of Bill Quirk, Piper Jaffray. Your line is open.

Great. Thanks. Good afternoon, everyone. So, Bryan, I appreciate that the company doesn’t necessarily want to talk about the leadership transaction or change rather, excuse me, that you just announced. But given the state of affairs here with some challenges with respect to reimbursement and hitting guidance and such. Can you help us -- could you give -- shed a little bit of light here in terms of what led to the change and how the board is thinking about the timetable here to nominate or rather to replace Mark with a -- I guess with the formal CEO. Thanks.

Sure. Thanks, Bill for the question. Really I will just refer you back to the press release. It was really just a -- as Mark in the Board looked at the next phase of value creation and growth for Myriad. There was just a mutual agreement that now is the right time for us a leadership transition and really that’s all that we are going to have to comment on that at this point.

Okay, got it. And then when we think about the guidance for the back half of the year, Bryan, is there any -- does that assume that the current environment that you are operating under with respect to pre-ops [ph] and collection challenges in such that that effectively stays the same. Does that suggest any improvements or for that matter any worsening in the environment?

Sure. Yes, for the back half of the year what we’ve assumed is just status quo the same level of reimbursement rates that we're seeing now. I think there will be some modest improvement as we go through the year and the initiatives have -- start to have an impact on our cash collection rates. But as you know those things intend to take more time than you like, but we're focused on the execution now of our initiatives. And so we're looking at a positive impact going forward. But for purposes of guidance, what we’ve built in is status quo.

Understood. All right. Thank you.

Thanks.

Next question comes from Doug Schenkel, Cowen. Your line is open.

Doug?

Doug Schenkel?

Okay. Sorry, can you hear me now?

Can hear you now.

Okay. So maybe first with a cleanup question and then with a bigger picture question. Can you just talk about revenue recognition practices going forward and what changes given a series of contra revenue developments across a couple of your businesses over the last few quarters?

Yes, sure. I think we talked about it to some extent on the -- during the formal script in terms of some of the improvements that we’ve made in order to help for earlier identification of changes in collection trends where we are seeing payers or patients or others pay at lesser rates than they have historically. So I think as we think about changes that we're making going forward, that that's really what’s going to have the biggest impact and make it more accurate and get us to the point where as this was the case in the current quarter for hereditary cancer is an example, we had a positive out-of-period adjustment as we had put in place some of the corrective measures to address the code switch change that we had that sort of bled over to the first part of the fiscal year. So I think really that’s what we’re focused on now is sort of early warning and early detection.

Okay.

Did I answer it? Was there more to the question?

That -- yes, that helps.

Sure. Okay.

So for the bigger picture question. The bigger picture question, it clearly was time for a change. Does the change at CEO go far enough? I know this is pretty direct Bryan and I don't mean to be rude, but I think it's fair to ask why investors should trust the broader management team and really largely the same Board of Directors that has been at the helm for the past decade. And why should investors trust this management team and this Board to make the right decisions after a decade plus of making so many wrong ones? What comes next in terms of leadership change? Not just with the management, but also at the Board level and on what timeline should we expect to hear more.

Sure. Well, yes it's a pretty direct question, Doug. What I will do that sort of formula -- help you with the answer is, I think really where we're focused right now is riding the ship in terms of hitting the numbers that we put out there. So really having an execution and accountability mindset. So first and foremost, focusing on that. I think beyond that, this is a business where the path from conception to commercial launch to reimbursement to broader utilization is a long path and so you I think as we talked about you see in some of the FY '21 positives that we have on the horizon. I think we are just on the cusp of really realizing, especially for GeneSight, Prolaris, myPath Melanoma, myChoice CDx with the recent payer coverage. I think it's just part of the cycle and as much as we would like for it to go more quickly, I think the reality is just that these things take longer than anyone would like. But I think -- in terms of the management team and the Board, we are all aligned around the strategy that we’ve laid out and we believe that the best path to returning to growth is to accelerate and that's why we talked about on the call the commercial launching of the sales force expansion for GeneSight. I think now we are at the point where we really just need to step on the gas relative to delivering on some of the revenue and -- that we’ve talked about historically and I think that will largely alleviate the concerns that you raised.

And next question comes from the line of Tycho Peterson with J.P. Morgan. Your line is open.

Hey, thanks. I want to start with the Counsyl and what's going on in the prenatal side. I know you’re setting the billing issues. We’ve heard just anecdotally, there's been a lot of turnover there, a lot of maybe retention issues. Can you speak to how the integrations gone? Obviously, you originally guided for it to be $0.20 accretive this year, that's not going to happen. But talk to how that integration has gone overall and you do have competitors like Invitae out there with $99 patient pay NIPT test now. So why is pricing not an problem for that business too.

Sure. Thanks, Tyco. I think as we look at the integration of the Counsyl business, first and foremost, I think obviously there have been some challenges there, the one that comes to mind obviously is the billing operations issues that we've had to deal with here in the current quarter. I think relative to the sales force, what we’ve talked about is the fact that we're focused on broadening the base and so as you think about a broader approach towards the Ob/Gyn market probably less focused on the IVF clinics and some of these other large volume clinics, which is probably where some of the folks that you are talking about are primarily focused. And we’ve actually seen relatively -- we’ve actually seen nice increase in volumes. We -- in the current month, in January, we actually had a record -- a couple of record days relative to the volumes for those businesses. So I don't think the issue is really driving further penetration and driving volume. I think at this point we’ve some operational issues relative to billing and collections, but we're still excited about the business and believe that we positioned it for long-term sustainable growth.

And Tycho, one thing I would just highlight, I think when you referenced the $99 price, that’s a patient cash pay price. It really matters in terms of the market and where pricing is, is where you’re contracting. And we’ve actually seen a lot of stability on the commercial side of the contracting. And I think when we look at where pricing can go, there's a number of upside drivers when we start thinking about large rearrangements, you start thinking about average risk testing, ECS and guidelines. And then also just executing on a lot of the cash collection initiatives that Bryan referenced earlier in the call. And so we actually see pricing trending up from current levels as we move forward here.

All right. And then in terms of follow-up, first on operating margins. Bryan, you emphasized the goal to protect earnings. If you -- I go back to 2016, you’re supposed to earn $4 this year. Now we’re talking about $0.45. So can you talk about steps operationally, you are taking and will take going forward to try to protect margins …

Yes.

… and including potential restructurings?

Sure. Yes. I think the couple of comments that I would have there. One is, obviously, the biggest driver and we’ve always said this for improving operating margins is reimbursement for our product that has a significant impact on our operating margin percentage. I think as we look at our cost initiatives, and we talked about this during our prepared remarks, over the last two quarters, we've seen roughly $5 million and lower operating expense. So we are very focused on managing the business, continuing to drive out costs both through our Elevate 2020 program, which has been very successful as well as the integration of Counsyl where we continue to integrate that business and yield cost savings. So those are going to be the primary drivers as we think about how we are going to improve operating margin. It's going to be focused on getting better -- higher reimbursement and then also at the same time managing our cost profile.

Right. If I could just ask one last quick one on GeneSight. Just so we’re clear, you're not factoring in other pre-auth with any other payers going forward, like you have with United. Is that fair to say that, or is that an issue with your other discussions? And then, secondly, there have been new drugs approved SPRAVATO, the nasal spray. How do you incorporate that into it, given that it wasn’t incorporated in the original trial?

Well, first, what I would say relative to -- and we haven’t provided FY '21 guidance. We’ve provided FY '20 guidance for GeneSight and its based on the payers that we have and the pre-auth programs that they have. So we haven’t added any new impact of any pre-auth programs, and then on the nasal spray question …

Yes. Tycho, I mean when you look at some of the newer drugs on the pharmacogenetic side, some of them are more in the acute-care settings where remember most of our patients are making selections on kind of longer term therapies. And so in a lot of cases, those aren’t necessarily relevant.

All right. Thank you.

Next question comes from the line of Sung Ji Nam with BTIG. Your line is open.

Hi. Thanks for taking the question. Sorry, I missed it, but was there an incremental out-of-period adjustment for hereditary cancer since the last quarter? And if so, what’s driving that. And are you making any progress in terms of payer collections around the non-contracted payers that you talked about last quarter?

Yes. So, Sung Ji, thanks for the question. I think when you see the Q, it will have the out-of-period -- the total out-of-period which is less than what the prenatal was. Prenatal was around $5 million. And so the balance is largely a positive out-of-period that we had for hereditary cancer and large part probably driven by some of what you referenced, which is are we contracting with some of these small payers, we continue to focus on that initiative and we hope to continue to have positive adjustments we're able to update those contracts and capture that revenue. But it was positive in the quarter.

Okay. And then you talked about the higher percent of samples denied from UnitedHealth. And I was wondering what’s driving that? Thank you. What drove that, I guess, actually.

Sure. Yes, I mean, I think right now we're focused on understanding all the drivers further for what’s not making it through the United pre-auth screen. What we’ve said -- we just said it was higher than what we had modeled, which was 30%. We are not going to get into the specifics, because it's a range of issues that we’re dealing with there. But when we talked about the revenue operations team, I mean, just to take that a little bit further, part of that is a dedicated enterprise wide pre-auth team that’s focused on reducing the number that don't make it through that process. So we hope to make improvement over time, but what we’ve seen in the current quarter since launch is just level -- are just levels that are higher than what we had expected.

And Sung Ji, one other things we talked about on the call was that some of the payers have preauthorization portals where the physician has to actually go in and do the preauthorization and be a registered user in that portal. And so one of the things that we obviously have to work through is getting physicians signed up. When you think about psychiatry, these aren’t physicians that tend to order a lot of diagnostic test. And so that’s been a major undertaking for the team is to get out there and getting physicians enrolled in those preauthorization portals.

Okay. Thank you.

Next question comes from Derik de Bruin with Bank of America. Your line is open.

Hi. This is Ivy Ma on for Derik today. Thank you for taking my questions. First one, so I appreciate the color on those items you talked about as potential upside drivers. I wanted to see what’s the probability of those items? Basically, can you unpack those then or rank order them in terms of likelihood of those happenings? Thanks.

Yes. Ivy, I think the first two that we referenced. Obviously, the Medicare LCD for GeneSight that could expand into primary care. We expect resolution on that here in the third quarter, and so the OB have relatively near-term resolution on that initiative. Additionally we talked about what’s the Prolaris LCDs for expanding into high risk and non-favorable intermediate patient. That’s something that we would expect this fiscal year. So those are relatively near-term events that we should get resolution on. The other piece of which is mainly the collections and improvements and collections for the hereditary cancer business and the prenatal business. That’s obviously a big focus of the business going forward here. We are actively working on implementing the number of initiatives. As Bryan stated, our guidance doesn’t anticipate any improvement based upon the number of programs that we are implementing. But that’s something that is actively ongoing right now.

And lastly, Ivy, just the last one on that list was the sales force expansion. One of the things that we are moving aggressively on is our initiatives that are focused on delivering revenue acceleration on the top line. And so we will be hiring those reps. We said we would be doing the hiring in Q4 and we expected to have a fiscal year 2021 impact.

Got it. Thank you. And then one on GeneSight. You said there was a fixed pricing arrangement with United. So wanted to see if you could comment on what that ASP is or the rough range, given the current commercial coverage? Thank you.

Yes. We didn’t -- we are not going to give the ASP in the contract. But, yes, we said on the call and in our press release that we had signed a new long-term fixed price contract with UnitedHealth for our portfolio of product.

All right.

Ivy, I think we described the agreement is very favorable. The one comment we did make around hereditary cancer is that felt the volume growth in year one in the contract could lead to offset the pricing headwinds that we would face associated with that new contract.

Great. That’s helpful. And then on GeneSight volumes, it sounds like the primary care decision is pretty much in the bag, but I wanted to see what kind of GeneSight volume trends would you characterize with or without the primary care for the rest of the year?

Yes. Ivy, I mean, obviously the Medicare decision hasn’t come yet. And so we’ve had positive dialogue and discussions with Medicare, but that decision will come, we’ve said this quarter. I think when you look at the primary care market, what we've said historically is that about 60% of the patients are in that channel. And we'd really be focusing initially on high-volume ordering physicians. We have doctor lists with about 15,000 physicians that comprise the larger -- more than half of that total volume. And so that would be the initial focus of the sales force expansion. The other piece of it is that we also have data on reimbursement levels on a nationwide basis. And so the targeted launch that we will be doing would really look at reimbursement levels and we'd be putting those reps into territories where there's the most favorable reimbursement on a nationwide basis, and obviously the Medicare LCD would be very helpful on that front.

Great. Thank you.

Next question comes from Puneet Souda with SVB Leerink. Your line is open.

Yes. Hi, thanks. Bryan, first question, when do you think the Counsyl billing transition is going to be resolved and where do you think you land in terms of ASP after all that is completed.

Thanks, Puneet. We've largely completed the transition to the new -- to our in-house billing systems. So that’s done. I think at this point where we’re focused on is the rev ops team is focused on improving that process. We had some process issues as we went through that transition. So I think relative to ASP we haven’t given our product specific ASP, but I think we would expect obviously given the impact what we saw in the current quarter is that you would see them higher than where they are currently and what is factored into our guidance.

Okay. And then I know you -- prior call you had mentioned about 300 payers contract that account for 85% of revenue in hereditary. And could you update us -- did you see the worsening ASP there, or worsening ASP in the -- among the smaller payers and where do you expect that -- those group to trend through the year?

Yes. I think -- and again, as you look at the -- as we look at Q2, we actually saw a positive adjustment in the current quarter really driven by the contracting process that we've done with this large group of payers, when would expect -- we would expect that to continue through the back half of the year. But again, they're very small individually, and so it takes a lot in order to make a difference. But I think our general feeling is that, we should see that improvements play out over time, which is what we’ve communicated previously.

Okay. Thank you.

Thank you.

Next question comes from the line of Jack Meehan with Barclays. Your line is open.

Thanks. And first one to wish Mark good luck, learned a lot from our interactions. Want to start with hereditary cancer testing. So you referenced that volumes were growing in the mid single-digits, but revenue declined in the high single digits. So that would imply price was down in the double-digits and talked about some of the adjustments there. So as we look forward, the United -- new United contract, what's a reasonable expectation for pricing in 2021? Can it be down in the double digits again.

Thanks, Jack, for the question. I know what we’ve talked about relative to hereditary cancer and the sequential change there from Q2 to Q3 was the impact of seasonality, the impact of PAMA, that was about $10 million. When we think about the United contract the reference that we made. Was it a few million of our total change was related to the renewed contracts that we had. And then the other data point that we gave was that the volume growth in hereditary would offset the pricing in year one. So our expectation would be -- and that’s -- that contract is retro to January 1. So what you will see in Q3 will be representative from an ASP perspective of -- kind of where the impact of -- we will incorporate the impact of the United renewal.

And what we said on the call, Jack, is that we didn’t anticipate anything else from a contracting standpoint. And as we go through this year, that would materially impact the pricing when we look at next year.

Is there any reason why the hereditary volumes would accelerate under the new UnitedHealth contract?

Yes, I mean, I think when you look at the contract, the contract obviously doesn’t really impact volume. We are in network provider with UnitedHealthcare. That status will remain the same. And so I don't see anything in the -- that would change the volume outlook relative to our current volume. And when we look at next year, we talked about a variety of factors. We’ve a series of new companion diagnostic approvals that are coming in the back half of the year here. One of those could be very significant, which is the OlympiA data that we talked about. From Astraseneca, that would be in adjuvant breast cancer indication, which is a very large indication and could expand testing in the breast cancer space pretty dramatically. But the contract itself wouldn't have an impact on our volume.

Okay. And then one follow-up on GeneSight. Just as we await the finalization of the LCD this quarter. Is there any risk that GeneSight $2,100 price could get reduced. And then similarly, are you planning to pursue your own CPT code for the test. Thanks.

Yes. Jack, when we look at the pricing, remember this is a coverage decision. It has nothing to do with actual pricing. We have a contract price through our local Medicare administrative contractor for GeneSight. And so there's been no indication that there's any type of pricing change on the horizon. When we -- can you remind maybe second question, I’m sorry.

Are you playing the procedure on CPT code for the test.

Yes, we haven’t talked about our strategy around CPT code for GeneSight. We’ve obviously thought about that internally. There's a series of things to think about there, but we haven’t publicly discussed that.

And gentlemen, there are no further questions at present time. Please continue with your presentation or closing remarks. Thank you.

All right. Thanks. Dave. This concludes our earnings call. A replay will be available via webcast and our website for one week. Thanks again for joining us this afternoon.

And that does conclude the conference call for today. We thank you very much for your participation and ask you please disconnect your lines.